Gary Galles: Minimum-wage hike hurts even gainers

Raising the federal minimum wage is again on President Obama's agenda. Unfortunately, the often-reprised debate focuses too narrowly on unemployment. Opponents warn joblessness will rise, while supporters assert the effects will be small, so that low-skill workers will benefit.

However, low-skill workers will be harmed even if unemployment effects are small.

Other things equal, higher minimum wages will reduce employment of low-skill workers. But other things will change. Employers will offset them by changing other conditions of employment, if possible, so their employment costs will not rise appreciably.

Employers offer compensation packages up to the value of a worker's output. Say a worker now gets the federal minimum wage of $7.25 plus fringe benefits worth $1.25 per hour. Raising the minimum wage to $9 would not change compensation, determined by the competition for workers, once employers adjust. Fringe benefits will erode, in the form of worsening working conditions, reduced health and retirement benefits or shrinking sick leave, vacation time or bonuses.

Perhaps worst of all, raising the minimum wage would eviscerate the primary means low-skill workers "pay" for on-the-job training (by accepting lower wages than otherwise), undermining one of their primary means of advancement. This makes even many apparent "winners" from a higher minimum wage – workers whose incomes immediately rise – losers over time, as their earnings grow more slowly as a result.

On-the-job training is the most efficient form of education for low-wage workers, because of tax advantages (fringe benefits are nontaxable) or other economies (health insurance is cheaper through employers), etc. But raising the minimum wage harms these workers when it costs them fringe benefits that they value more than the added (now taxable) income.

If a higher minimum wage made low-skill workers better off, it would increase their labor force participation rate and reduce the rate at which they quit their jobs. But in both cases, the opposite is true.

Where fringe benefits cannot be reduced, the results are no better. Employers increase skill and work requirements. Those with the fewest skills, least education and job experience – particularly minority teens – face the greatest unemployment effects. This is why, in 1948, before the minimum wage was so broadly applied, the unemployment rate for black teens was below that of the general population, but by 1995 their unemployment rate was more than double. Magnifying the effect is that an employer pays far more than wages to minimum-wage workers, in the form of the employer half of Social Security, unemployment insurance and worker's compensation.

Minimum wage hike proponents cite their compassion for the working poor. But effective compassion requires careful analysis as well as caring, and that cannot justify raising the minimum wage. It harms not only those who lose their jobs, disproportionately the young and least-skilled, but also the supposed winners, whose higher initial incomes soon are more than offset by slower income growth over time.